PAULA ROJO MANAGEMENT ACCOUNTING 12/09/2022

CHAPTER 15. THE NATURE OF MANAGEMENT ACCOUNTING

FINANCIAL ACCOUNTING

Focuses on preparation of financial statements required by GAAP.

o Prepared for use by external users.
o Provides summary of an entity’s financial condition and results of activities.

MANAGEMENT ACCOUNTING
Assist managers in formulation and implementation of organization’s strategy.
Applies to all organizations.
Use both quantitative and qualitative information.
 Decision-facilitating information.
 Decision-influencing information.
ACCOUNTING JOBS
Management accountant:
o Responsible for design and operation of management accounting system.

o Certified Management Accountant (CMA)

 Professional designation of knowledge of management accounting principles and techniques.

Controller.
o Frequently highest level accountant.

o Usually has both financial and management accounting responsibility.

o Reports to Chief Financial Officer (CFO).

Treasurer.
o Responsible for cash management.

 E.g., raising cash when needed by borrowing or issuing stock and investing excess cash.
MANAGEMENT ACCOUNTING VS. FINANCIAL ACCOUNTING
NECESSITY

Management Accounting Financial Accounting

• Optional. • Required.
• Information’s value to management. • Requirements of FASB,
SEC, IRS, etc.

PURPOSE

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Management Accounting Financial Accounting

• Produce information for • Produce information for

planning, implementing, and outside users.
control functions.

USERS

Management Accounting Financial Accounting

• Internal users. • External users.

• Managers. • Shareholders.
• Individuals who assist in • Creditors.
analysis.
• Government agencies.
• etc.

UNDERLYING STRUCTURE

Management Accounting Financial Accounting

• Information to assist in decision • Accounting Equation: Assets =

making related to: Liabilities + Shareholders’ Equity.
• Measurement.
• Control.
• Alternative choices.

SOURCE OF PRINCIPLES

Management Accounting Financial Accounting

• Information • GAAP.
usefulness for decision
making.

TIME ORIENTATION

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Management Accounting Financial Accounting

• Primarily future oriented. • Primarily past oriented.

• E.g., forecasts, estimates, • Reporting of financial history.
plans.
• Some historical information
for predictive value.

INFORMATION CONTENT

Management Accounting Financial Accounting

• Both monetary and • Primarily monetary

nonmonetary events (i.e., accounting
information. transactions).

INFORMATION PRECISION

Management Accounting Financial Accounting

• Information frequently • Uses some approximations.

needed quickly.
• However, precision usually
• Precision sometimes greater than in Management
sacrificed for speed in Accounting.
reporting.

REPORT FREQUENCY

Management Accounting Financial Accounting

• Can be monthly, weekly, • Annually with less detailed

daily, or even more interim reports.
frequently.
• May need real-time access to
information.

REPORT TIMELINESS

Management Accounting Financial Accounting

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• Quickly to be useful for decision • Usually, several weeks to

making. months after fiscal close of
accounting period.

REPORT ENTITY

Management Accounting Financial Accounting

• Usually relatively small parts • Primarily organization as a

of the organization (e.g., whole.
departments, product lines,
divisions, subsidiaries, etc.)

LIABILITY POTENTIAL

Management Accounting Financial Accounting

• Little or none because • Threat exists when

reporting and supporting there is misleading
documentation is reporting to external
internal. parties.

SIMILARITIES - MANAGERIAL VS. FINANCIAL

o Many of same considerations that make sense for GAAP also make sense for internal decision making.

o Accounting systems usually designed to provide information for both.

o Reports from both are used in decision making by users.

PURPOSES & USES OF MANAGEMENT ACCOUNTING INFORMATION

o Measurement purpose.

 Measurement of revenues, costs, and assets.

o Control purpose.

 Evaluate operations and (if needed) assign corrective action to person/organization unit responsible.
o Alternative courses of action purpose.

 Analyze information and choose best course of action.

CHARACTERIZATION OF MANAGEMENT ACCOUNTING INFORMATION
o Historical information:

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 Score keeping (How are we doing?).

 Attention directing (What problems require looking into?).
o Future estimates:

 Problem solving (What is best way to deal with a problem?).

 Influencing impact (influences actions of managers).
MEASUREMENT
Full cost accounting.
o Measures resources used in performing some activity.

o Full cost = direct costs + indirect costs.

 Direct costs are costs directly traced to goods or services.

 Indirect costs are fair share of costs incurred jointly in producing goods or services.
CONTROL
Use of responsibility centers.
 Costs, revenues, and/or assets are identified to and measured by responsibility center.
 Actual results are compared to a budget or benchmark.
 Corrective action taken by person(s) responsible.
ALTERNATIVE CHOICE DECISIONS
 Differential costs of alternative possible actions are developed and analyzed.
 Focus on relevant costs.
E.g., Only considering direct costs for some short run decisions.
DATABASES
Spreadsheets:
 Two dimensional arrays of data.
Database systems:
 More powerful.
 Easily sorts data, links data, manipulates data, and quickly make reports available to help in decision
making.
GENERAL OBSERVATIONS ON MANAGEMENT ACCOUNTING
Different numbers for different purposes.
• What “cost” are we talking about?
• Historical, standard, overhead, variable, differential, marginal, opportunity, direct, estimated, full…? etc.
Accounting numbers are approximations.
• Some numbers are more accurate than others.

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Working with incomplete data.

• Often must make decisions without all pertinent information.
Accounting evidence is only partial evidence.
• Other more qualitative factors are also important in decision making.
People, not numbers, get things done.
• How you use the numbers is as important as how the numbers are produced.